Chapter 2: Chapter 2:

Cost Terms and Purposes

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Horngren 13e

AN OVERVIEW OF COST TERMS

Purpose of classification Cost classifications

Preparing an income statement and balance sheet

• Product costs• Direct materialsbalance sheet Direct materials• Direct labor• Manufacturing overhead

• Period costs (nonmanufacturing costs) S lli t• Selling costs

• Administrative costs

Predicting changes in cost due to • Variable costs Predicting changes in cost due to changes in activity

Variable costs • Fixed costs

Assigning costs • Direct costs • Indirect costs

Making decisions • Differential costs • Sunk costs • costs

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PRODUCT vs. PERIOD COSTS

Factory

Sales & Administration

LEARNING OBJECTIVE1. Define and illustrate a cost object

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LEARNING OBJECTIVE1. Define and illustrate a cost object

[EXERCISE]

Lucas Manufacturing has three cost objects that it uses to accumulate costs for its manufacturing plants. They are:

Cost object #1: The physical buildings and equipmentCost object #1: The physical buildings and equipmentCost object #2: The use of buildings and equipmentCost object #3: The availability and use of manufacturing labor

The following manufacturing overhead cost categories are found in the accounting records:a. Depreciation on buildings and equipment b. Lubricants for machines c Property insurancec. Property insuranced. Supervisors’ salariese. Fringe benefits f. Property taxes g. Utilities

Required: Assign each of the above costs to the most appropriate cost object.

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LEARNING OBJECTIVE1. Define and illustrate a cost object

[SOLUTION]

Cost object #1: The physical buildings and equipment

a. Depreciation on buildings and equipment c Property insurance

Cost object #2: The use of buildings and equipment

c. Property insurancef. Property taxes

Cost object #3: The availability and use of manufacturing labor

b. Lubricants for machines g. Utilities

Cost object #3: The availability and use of manufacturing labor

d. Supervisors’ salariese. Fringe benefits

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LEARNING OBJECTIVE

2. Distinguish between direct costs and indirect costs

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LEARNING OBJECTIVE2. Distinguish between direct costs and indirect costs

[EXERCISE]

Archambeau Products Company manufactures office furniture. Recently, the company decided to develop a formal cost accounting system and classify all costs into three categories. Categorize each of the following items as being appropriate for (1) cost tracing to the finished furniture (2) cost allocation of an indirect manufacturing cost to the finished

Cost Cost Nonmanu-Item Tracing Allocation facturing

to the finished furniture, (2) cost allocation of an indirect manufacturing cost to the finished furniture, or (3) as a nonmanufacturing item.

Carpenter wages ________ ________ ________Depreciation - office building ________ ________ ________Glue for assembly ________ ________ ________Lathe department supervisor ________ ________ ________Lathe depreciationLathe depreciation ________ ________ ________Lathe maintenance ________ ________ ________Lathe operator wages ________ ________ ________Lumber ________ ________ ________Samples for trade shows ________ ________ ________Metal brackets for drawersMetal brackets for drawers ________ ________ ________Factory washroom supplies ________ ________ ________

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LEARNING OBJECTIVE2. Distinguish between direct costs and indirect costs

[SOLUTION]

Archambeau Products Company manufactures office furniture. Recently, the company decided to develop a formal cost accounting system and classify all costs into three categories. Categorize each of the following items as being appropriate for (1) cost tracingg g g g pp p ( ) gto the finished furniture, (2) cost allocation of an indirect manufacturing cost to the finished furniture, or (3) as a nonmanufacturing item.

Cost Cost Nonmanu-Item Tracing Allocation facturing

Carpenter wages XDepreciation - office building Xp gGlue for assembly XLathe department supervisor XLathe depreciatio n XLathe maintenance XLathe operator wages XLathe operator wages XLumber XSamples for trade shows XMetal brackets for drawers XFactory washroom supplies X

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LEARNING OBJECTIVE

3. Explain variable costs and fixed costs

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3. Explain variable costs and fixed costsp

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LEARNING OBJECTIVE3. Explain variable costs and fixed costs

[EXERCISE]

B tl H it l t t ti t th t f h ti t t It i l h lth Butler Hospital wants to estimate the cost for each patient stay. It is a general health carefacility offering only basic services and not specialized services such as organ transplants.

Required: a. Classify each of the following costs as either direct or indirect with respect t h ti tto each patient.

b. Classify each of the following costs as either fixed or variable with respect to hospital costs per day.

Direct Indirect Fixed Variable

Electronic monitoring ______ ______ ______ ______g ______ ______ ______ ______

Meals for patients ______ ______ ______ ______

Nurses' salaries ______ ______ ______ ______

Parking maintenanceParking maintenance ______ ______ ______ ______

Security ______ ______ ______ ______

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LEARNING OBJECTIVE3. Explain variable costs and fixed costs

[SOLUTION]

B tl H it l t t ti t th t f h ti t t It i l h lth Butler Hospital wants to estimate the cost for each patient stay. It is a general health carefacility offering only basic services and not specialized services such as organ transplants.

Required: a. Classify each of the following costs as either direct or indirect with respect t h ti tto each patient.b. Classify each of the following costs as either fixed or variable

with respect to hospital costs per day.

Direct Indirect Fixed Variable

Electronic monitoring X XMeals for patients X XNurses salaries X XParking maintenan ce X XSecurity X X

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QUIZ QUESTION

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QUIZ QUESTION

[SOLUTION]

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LEARNING OBJECTIVES

4. Interpret unit costs cautiouslyfor many decisions managers should use total …for many decisions, managers should use total

costs, not unit costs.[EXERCISE][EXERCISE]

Combs, Inc. reports the following information for September sales:

Sales $15,000Variable costs - 3,000Fixed costs - 4,000

$Operating income $ 8,000

Required:If l d bl i O t b h t i th j t d ti i ?If sales double in October, what is the projected operating income?

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LEARNING OBJECTIVES

4. Interpret unit costs cautiouslyfor many decisions managers should use total …for many decisions, managers should use total

costs, not unit costs.[SOLUTION][SOLUTION]

Combs, Inc. reports the following information for September sales:

Sales $15,000Variable costs - 3,000Fixed costs - 4,000

$Operating income $ 8,000

Required:If l d bl i O t b h t i th j t d ti i ?If sales double in October, what is the projected operating income?Answer: (15,000 x 2) - ($3,000 x 2) - $4,000 = $20,000

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LEARNING OBJECTIVES

4. Interpret unit costs cautiouslyfor many decisions managers should use total …for many decisions, managers should use total

costs, not unit costs.[EXERCISE][EXERCISE]

Axle and Wheel Manufacturing currently produces 1,000 axles per month. The following per unit data apply for sales to regular customers:

Direct materials $200Direct manufacturing labor 30Variable manufacturing overhead 60Fixed manufacturing overhead 40

Total manufacturing costs $330Total manufacturing costs $330

The plant has capacity for 2,000 axles.

Required:

a. What is the total cost of producing 1,000 axles?b. What is the total cost of producing 1,500 axles?c. What is the per unit cost when producing 1,500 axles?

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LEARNING OBJECTIVES

[SOLUTION]

A l d Wh l M f t i tl d 1 000 l th Th f ll i

Direct materials $200

Axle and Wheel Manufacturing currently produces 1,000 axles per month. The followingper unit data apply for sales to regular customers:

Direct materials $200Direct manufacturing labor 30Variable manufacturing overhead 60Fixed manufacturing overhead 40

Total manufacturing costs $330

The plant has capacity for 2,000 axles.

Required:

a. What is the total cost of producing 1,000 axles?b. What is the total cost of producing 1,500 axles?c. What is the per unit cost when producing 1,500 axles?

Answer:

a. [($200 + $30 + $60) x 1,000 units] + ($40 x 1,000 units) = $330,000

b. [($200 + $30 + $60) x 1,500 units] + $40,000 = $475,000

$475 000 / 1 500 $316 67 it

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c. $475,000 / 1,500 = $316.67 per unit

LEARNING OBJECTIVES

5. Distinguish among manufacturing companies merchandising companies and companies, merchandising companies, and service-sector companies

different types of companies face different …different types of companies face different accounting issues.

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LEARNING OBJECTIVES

6. Describe the three categories of inventories commonly found in manufacturing companiescommonly found in manufacturing companies

•Direct Materials•Work in Process•Finished Goods

7 Differentiate inventoriable costs7. Differentiate inventoriable costs… assets when incurred, then cost of goods sold from period costsso d o pe od costs… expenses of the period when incurred.

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[EXERCISE]

Helmer Sporting Goods Company manufactured 100,000 units in 20x3 and reported the following costs:

[EXERCISE]

Sandpaper $ 32,000 Leasing costs - Equipment $ 384,000Materials handling 320,000 Depreciation - Equipment 224,000Coolants & Lubricants 22,400 Property taxes - Equipment 32,000Indirect manufacturing labor 275,200 Fire insurance - Equipment 16,000Di t f t i l b 2 176 000 Di t t i l h 3 136 000Direct manufacturing labor 2,176,000 Direct material purchases 3,136,000Direct materials, 1/1/x3 384,000 Direct materials, 12/31/x3 275,200Finished goods, 1/1/x3 672,000 Sales revenue 12,800,000Finished goods, 12/31/x3 1,280,000 Sales commissions 640,000Work-in-process, 1/1/x3 96,000 Sales salaries 576,000pWork-in-process, 12/31/x3 64,000 Advertising costs 480,000

Administration costs 800,000

Required:

a. What is the amount of direct materials used during 20x3?b. What manufacturing costs were added to WIP during 20x3?c. What is cost of goods manufactured for 20x3?d. What is cost of goods sold for 20x3?

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[SOLUTION][SOLUTION]

Required:

a. What is the amount of direct materials used during 20x3?b What manufacturing costs were added to WIP during 20x3?b. What manufacturing costs were added to WIP during 20x3?c. What is cost of goods manufactured for 20x3?d. What is cost of goods sold for 20x3?

Answ er:

a. $384,000 + $3,136,000 - $275,200 = $3,244,800

b. $3,244,800 + $2,176,000 + $32,000 + $320,000 + $22,400 + $275,200 + $384,000 + $224,000 + $32,000 + $16,000 = $6,726,400

c. $6,726,400 + $96,000 - $64,000 = $6,758,400

d. $6,758,400 + $672,000 - $1,280,000 = $6,150,400

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QUIZ QUESTION

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QUIZ QUESTION

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QUIZ QUESTIONS

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QUIZ QUESTIONS

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